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PADMASHREE DR.D.Y.PATIL UNIVERSITY

(DEPARTMENT OF BUSINESS

MANAGEMENT)

COST ACCOUNTING

Report

On

COST REDUCTION METHOD FOLLOWED

SUBMITTED TO:-

PROF. SHWETA

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GROUP MEMBERS:

1. Digvijay Tendulkar 108

2. Rupal Upadhayay 045

3. Priyanka Gharat 107

4. Kavita Tiwari 105

5. Anisha Subramaniam 104

6. Poonam suryawanshi 122

7. Prerna Lodha 042

8. Shalaka Mohite 044

9. Sarvesh Damle 113

10.Avinash Repale 116

11.Abhishek Singh Yadav 031

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INDEX:

INTRODUCTION

SCOPE OF COST REDUCTION

ADVANTAGE OF COST REDUCTION

COST REDUCTION V/S COST CONTROL

STEPS IN REDUCING COST AND INCREASING

PROFITS

COST REDUCTION TECHNIQUES

EXAMPLES OF COMPANIES USING COST

REDUCTION TECHNIQUES

BIBLIOGRAPHY

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Almost every organization in the world today is looking at

ways to reduce costs. Some companies can do this fairly

simply by closing factories or giving top-down targets to all

relevant departments (costs to be reduced by 20%). Other

companies feel that they require a more fundamental approach

and restructure the way that they do their business. Sometimesthis includes a strategic review of which products and services

should be offered to the market, other times the markets

served are seen as stable. In the second case there is usually a

need to fundamentally re-assess how the products / services

are brought to market in order to radically decrease the costs

and/or to improve service levels.

What is Cost Reduction?

Cost reduction is to be understood as the achievement of real

and permanent

reductions in the unit cost of the goods manufactured or

services rendered without impassing their suitability for the

use that is intended- ICWA London.

Cost reduction is not simply attempting to slash any and all

expenses immethodically. The owner-manager must

understand the nature of expenses and how expenses inter-

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relate with sales, inventories, cost of goods sold, gross profits,

and net profits.

Cost reduction does not mean only the reduction of specific

expenses. You can achieve greater profits through more

efficient use of the expense dollar. Some of the ways you do

this are by increasing the average sale per customer, by

effectively using display space and thereby increasing sales

volume per square foot, by getting a larger return for youradvertising and sales promotion dollar, and by improving your

internal methods and procedures.

SCOPE OF COST REDUCTION:

Cost reduction is attainable in almost all areas of business

activities. There is perhaps no situation which cannot be

improved. It covers a wide range like new layout, productdesign, production methods, materials and machines in

factories as well as in offices, innovation in marketing etc. it

may also extend to specified activities like purchasing,

handling, packaging, shipping, warehousing, marketing, use

of administrative facilities and even the utilization of financial

resources.

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Excessive cost may result in every organization from:-

1. Lack of information about raw material, processes,

products, components etc.

2. Lack of utilization of ideas generated form performance

and economic analysis

3. Honest but wrong beliefs that certain things are impossible

for achievement

4. Temporary circumstances like features developed under

pressure or modification made to meet certain circumstances

5. Habits and attitudes of confining to one conventional

method

It is not necessary for the management to proceed in any

specific sequence in considering the various aspects of cost

reduction and it may be necessary to start the campaign in

more than one direction at the same time.

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ADVANTAGES OF COST REDUCTION:

In so far as Individual capacity is concerned, cost

reduction helps in profit improvement.

It enhances the share value, improves investment

opportunities and facilitates the collection of capital.

The society will be benefited by the reduced prices

which may be possible by savings from cost reduction

programs.

Workers and staff of the industry may also be

benefitted through increased wages and improved staff

welfare amenities.

The country also stands to gain immensely by the

cost reduction programs.

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COST REDUCTION vs. COST CONTROL:

COST REDUCTION

COST CONTROL

This process finds out thesubstitute by finding newways or methods

This process undertakes thecompetitive analysis ofactual results withestablished norms

Under this process

necessary steps are takenfor further modification inthe method.

Under this process the

variances are appraised andnecessary course of actionwill be taken to revisenorms, standards etc

It challenges the standardsforth with and attempts to

reduce cost on a continuousbasis .

It starts from establishedcost standards and attempts

to keep the costs ofoperation of a process inline with those standards.

The emphasis is partly onthe present costs and

largely on future costs.

The main stress is on thepresent and past behavior

of costs.

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It is universally applicable.It should be applied to

every area of business. Itdoes not depend onstandards, through targetamounts may be set.

It has limited applicabilityto those items of costs for

which standards havealready been set. The itemsfor which standards are setmainly relate to productiveoperations

Cost reduction is a

corrective function. Itoperates even whenefficient cost control systemexists

Cost control is a preventive

function. Costs areoptimized before they areincurred.

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Following are major areas of COST REDUCTION:

1. Raw material procurement:

a) Bulk buying

b) Opportunity buying

c) Make or buy

d) Annual Rate contracts

2. Logistics- Inbound and Outbound:

a) Route mapping

b) Loadability

3. Warehouse and Stores:

a) Low inventory

b) Space management

c) EOQ

4. Manufacturing Process (Production):a) manufacturing

b) Automation

5. Energy, fuel & Water

a) Motors

b) lighting

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c) compressors

d) fuels

e) recyclef) Waste water management

6. Information Management Enterprise Resourcemanagement

7. Human Resources Out-sourcing

The following are 10 steps a manufacturing business can use

to become more sustainable and green while reducing your

costs and increasing your profits:

1. Adopt a Sustainable Business Strategy

Your strategy should begin by creating a green supply chainmanagement that fits sustainability into your core businessstrategy. Sustainability is development that meets the needs ofthe present without compromising the ability of future

generations to meet their own needs. It represents the meansby which your business can achieve reduced costs andincreased profits. Commit to building your business greenfrom the inside out by redefining your goals so that theyincorporate sustainable thinking into every aspect of yoursupply chain, from purchasing to production. If you commit toan informed sustainability strategy, it can be a catalyst forinnovation in your business.

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2. Implement a System Evaluation

You need to review every aspect of your supply chain. Lookfor areas where significant environmental costs occur. Useteams of people that include members from different divisionsto identify these problem areas and determine what you cando to yield significant cost-saving while reducingenvironmental impacts. After calculating the benefits, you

should begin implementing procedures that will correct theproblem areas within your overall system.

3. Review Your Purchasing Procedures

Purchasing is the point where materials come into themanufacturing process. Becoming greener means using

suppliers with a higher environmental performance. Thisincludes environmentally friendly raw materials that arenatural, organic, and biodegradable. One practice beingadopted by businesses is to put all purchasing under onedepartment. Advantages include buying in larger quantities ata lower price, storing materials in a central location, anddistributing materials as needed, cutting waste due to

materials not being used in a timely manner.

4. Make Your Manufacturing Methods More Efficient

The goal is to implement a process that is efficient and haslittle or no waste. This lightens your global environmentalfootprint while improving the quality of your companys

products. Efficiency pertains to increasing your productionrates by producing the same amount of product using less

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floor space. The past 10 years has brought new ways ofthinking that have created more efficient methods for doingthings. Building and operating a production line today costs

less than its counterpart did 10 years ago.

5. Reduce Energy Consumption and Costs

By implementing an energy-saving program, you couldpotentially reduce your electrical consumption by half.Another method for reducing energy consumption and costs is

by using renewable energy sources. For example, carpetmanufacturer Tandus uses 100 percent biodiesel, a renewableenergy source. It replaced diesel fuel in its commercial boilersand as a consequence reduced air toxins by 60 percent to 90percent, particulates by 48 percent, and carbon dioxide by 78percent.

6. Purchase Energy-Saving Machinery

Facilities and equipment management is an area wheremanufacturers can improve their sustainability. Recentinnovations have increased the efficiency of machines whilereducing their impact on the environment. New equipmentwith energy-saving and eco-friendly features can reduce costs

by operating more efficiently, utilizing materials to theirfullest, and producing a better product at a faster rate withlittle or no environmental impact.

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7. Produce Products That Are Recyclable or

Biodegradable :

Design and manufacture products that are organic and health-conscious rather than toxic to your customers. Consumers arebeginning to demand that the products they buy be eitherrecyclable or biodegradable. Your company should devise asustainability warranty that guarantees that the waste fromyour products will not wind up in landfills or be incineratedinto the air. This gives your customers proof that you do whatyou say.

8. Reduce and Recycle Waste

Reduce waste and create a closed-loop program. This meansrecycling a product back into itself, essentially creating little

or no environmental waste. This is a key element in naturalresource preservation and sustainability.

9. Become Educated on Green Manufacturing Practices

Environmental literacy, research, and continuous learning areessential to your process of becoming green and creating a

safer work environment. Educate your staff. Require everyoneto participate in the movement to green manufacturing.

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10. Stay Informed About Government Regulations

Take a proactive approach to stay ahead of the environmentalregulations that various government agencies impose onmanufacturing businesses. Inform yourself regarding bothcurrent and impending regulations that affect your business.Honda and Toyota are examples of manufacturers stayingahead of the regulations. Both companies have developed andproduced new engines that not only meet but exceed therequirements.

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COST REDUCTION TECHNIQUES:

1. Eliminate Paper Flow

A great way to improve productivity

while lowering costs is to eliminate paper flow. The average

office worker prints 10,000 sheets of paper a year. The best

approach is to place all documents online for employees to

download, read, and make changes to. Also, instruct all

employees not to print e-mails and other unnecessary

documents that will usually end up in the trash upon a few

quick glances. Have IT set all printers to print doubled sided.

2. Ask for Employee Suggestions

Employee suggestions play a vital role in cost reduction and

increasing productivity because employees have moreexperience regarding daily operations in a business. Every

suggestion that your business implements improve your

business in some way. Performance may be improved,

customer satisfaction may increase, costs reduce, or some

other positive impact improves your business in some way.

The average employee suggestion saves the company $6,224

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in operational expenses. The more ideas you implement the

more your business will improve. These suggestions will add

up over time and can be used as a competitive advantage.

3. Collaborate with Suppliers

Your vendors are your best allies

when implementing cost reduction strategies within your

organization. Consider a variety of programs, such as vendor

managed inventory systems (VIM), vendor stocking programs(VSP), and common supplier joint procurement policies.

Choosing a VSP reduces inventory costs for less popular

items and increases supplier reliability and dependency.

Alleviate the nightmare of managing inventory by giving the

responsibility to the vendor, which reduces your inventory

and related expenses.

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4. Reduce Lead Times

When a product arrives at the warehouse it inevitably takes

several days for it to reach the customer. Review and refineyour receiving protocols to ensure products hit the shelves

with minimal delay by maintaining adequate order supply

rates and throughput levels. Consider rationalizing SKUs by

removing inappropriate products from the shelves. Maintain

optimal levels by reducing safety stock inventory and

increasing order fill rates.

5. Manage and Optimize Your Inventory

Enhance your cost reduction efforts by monitoring your

inventory on a weekly basis, noting the exact supply levels of

each item in the warehouse. Internal inventory management iscost efficient, however; larger companies may find external

inventory management a viable option. Create an automated

system to automatically order new supplies, which reduces

back office labor expenses. Improve efficiency and maximize

space by organizing inventory supplies and modifying the

layout of the room or warehouse. Keep the aisles free of

debris and narrow, with enough room for handcarts, forklifts,

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or other equipment. Consider liquidating products that are

expiring soon or have a history of poor sales.

6.Analyze Supply and Demand

You need to analyze supply and demand in order to

effectively lower supply costs and increase productivity in

your organization. Work with the sales team reviewing salesfigures from the past several years, forecasting sales for the

next three months based on consumer confidence, past sales,

acquisitions, and merges. Keep in mind external variables

such as weather, the economy, holidays, and national events.

Repeat the process each quarter, refining forecasts as

necessary. A good cost reduction strategy requires businessesto stay one step ahead of the consumer.

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7. Downsizing

Some company leaders feel they can reduce costs by simply

downsizing or reducing the number of workers. If this is done

after defining the exact role of every staff, it may be a

necessary and effective method. Unfortunately, most

businesses that reduce their headcount do so without really

knowing the impact on the company's operations. All they

really do is let off some staff to reduce the wage bill. One of

the biggest effects of downsizing to reduce costs is that, often,

good employees leave for greener pastures. Thus the business

is left with the "deadwood" staffs, who are expected to do

twice as much work as before.

8.Reducing Customer Service Levels

Customer service can be a hassle and is often an expensive

issue. Sometimes to cut costs, businesses will reduce oreliminate the range of added services they give to the

customers. Unfortunately, a neglected customer will become

an ex-customer. He or she will simply go to your competitor,

who will be glad to service their needs at your expense.

Companies must see the benefits of customer satisfaction in

establishing long-term business relationships. A satisfiedcustomer is often a repeat customer. Also, the customer may

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network with other clients and refer them to your business.

This means that you not only have a source of continuous

business, but you have a viable route to new business

opportunities. This can save your company money that might

be spent on advertising. Repeat business and word-of-mouth

advertising are the excellent ways of maintaining a healthy

business.

9. TQM ToolsThe total quality management (TQM) philosophy of doing

business emphasises lowering costs by reducing waste,

helping suppliers provide quality products and satisfying the

customer with quality goods and services. Companies that can

produce goods at lower costs than their competitors, while

delivering quality products that satisfy their customers, havean advantage. Implementing TQM can help a company gain a

competitive advantage in their business.

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SOME EXAMPLES OF COMPANY USING

COST REDUCTION TECHNIQUES:

INDIA MART

Supply Chain Cost Reduction

Apply Lean techniques to identify non-value added time and

cost in the supply chain.

End-to-end supply chain modelling is used to study supplier

to market allocations.

We use freight cost benchmarking and auditing to ensure that

the tariffs reflect market rates and that complex freight

invoices are accurate.

Our inventory model is used to calculate the stock levels to

achieve the required level of customer service.

Example projects have provided cost savings of 26% by

improving product sourcing by market, service improvementsof 10% with no increase in inventory, over 10% reduction in

international freight costs and 30% reduction in lead time.

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Warehousing & Transport Cost Reduction

Our Operational Benchmarking establishes how you stand

against both the industry peer group and our best practicemodel.

Cost profiles clearly identify discrepancies between where

you are and where you should be. All key cost drivers such as

manning, space and mileage are assessed in terms of the

correct and forecast business volumes. Our experienced team

gives practical guidance through the implementation of ourrecommendations.

Negotiations with third party contractors are supported with

clear independent reasoning.

Example projects have achieved labour cost savings of 10%

or more, 30% increased capacity and 20% on third party costs.

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Strategis IT Cost Reduction

Doing more with less

The current economic climate will force all businesses tothouroughly examine their cost structure. Whileorganisations in some industries are more impacted thanothers, all organisations are proactively seeking ways tocut costs. Further, over the time as IT costs make up ahigher percentage of the revenue, CIOs who will have

clear mandates to do more with less within aggressivetime frames. By taking a hollistic approach that isEnterprise wide, examines all IT spent and prioritizesthe right IT cost reduction opprtunities. CIOs wil be ableto successfully meet their objectives.

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TATA MOTORS

How could Tata Motors make a car so inexpensive?

( NANO)

No Radio, Power windows, air conditioning, anti lock

brakes, air bags, remote locks or power steering.

Rear wheel drive: manually actuated 4-speed trans axle

that gives the car better fuel efficiency

Wheel Bearing: Wheel bearing is strong enough to drive

the car at 72kmph but would quickly wear out at higher

speeds.

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Analogue speedometer, odometer and fuel gauge.

Single windscreen wiper

Fundamentally, the engineers worked to do more with

less. The car is smaller in overall dimensions than the

Maruti, but it offers about 20 per cent more seating capacity

as a result of design choices such as putting the wheels at

the extreme edges of the car.

Competitive advantages that Tata Motors has whichothers do not possess:

Cheapest car in the world tag.

The Chairman Ratan Tata is a socialist who helped

victims of 26/11(corporate social responsibility).

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SANDOZ COMPANY (PHARMACEUTICAL

COMPANY)

We personally visited SANDOZ COMPANY in NAVI

MUMBAI. We had a conversation with Mr. Shubratoh

Banerjee. He gave us very useful information and helps us to

know about the cost reduction done in his company.

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Firstly the company concentrates on fixed cost and

variable cost. As fixed cost is constant the company

works on variable cost depending on how much units to

produce.

Reutilization:

Generally one person should work on one activity,

but if u want to reduce cost, the employee should be

trained and hence he can do multi-tasking job. Due to

this number of employees will be reduced andcompanys pay packages will decrease.

Produce more to lower the cost.

Increase the capacity as fixed cost will b same but per

unit cost will change.

Efficiently utilization of equipments:

The company uses energy efficient equipments.

AREAS WHERE COST REDUCTION CAN BE DONE:

Mostly works on ABC CONCEPT. The areas having

largest cost are attacked first and then worked on

reducing its cost. Areas where variability of cost can be

done.

Recurring expenses:

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Preventative maintenance should be done on heavy

equipments which need time to time service to be done.

Due to this huge lose can be avoided by breakdown of

machineries.

ADVANTAGES:

The payback period of the equipments can be calculated.

Due to energy efficiency machineries, the company

could compute the fuel and energy that is saved.

Their production capacity has increased three times.

BIBLIOGRAPHY:

www.the-cost-reduction-consultant.com

Buzzle. com

www.infosys.com/offerings/industries

www.indiamart.com

www.us.sandoz.com/site/en/company/profilE

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http://www.the-cost-reduction-consultant.com/http://www.the-cost-reduction-consultant.com/http://www.infosys.com/offerings/industrieshttp://www.infosys.com/offerings/industrieshttp://www.indiamart.com/http://www.indiamart.com/http://www.us.sandoz.com/site/en/company/profilEhttp://www.us.sandoz.com/site/en/company/profilEhttp://www.the-cost-reduction-consultant.com/http://www.infosys.com/offerings/industrieshttp://www.indiamart.com/http://www.us.sandoz.com/site/en/company/profilE


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